The Economics of Apple iPhone Introduction (1)

VisionArena Insight Report, Sept 2009 1

VisionArena Insight Report 2009

The Economics of Apple iPhone Introduction (1)

- How can we know which Mobile

Operators does Apple prefer by

market?

By Brad Cho

For more information visit site

http://www.visionarena.net

Recently Apple shows its way that is pretty much differentiated with its competitors.

Since Apple announced iPhone 3G model in MacWorld conference, people outside U.S

always want to know if Apple will enter their living country and which mobile operator

Apple will choose at first.

Not surprisingly we can assume that Apple has its own ‘Strategic Calculator’ that tells

which partnership in specific country is the best choice for Apple.

Of course, Apple might be going to solve this problem case by case approach.

But Apple’s approach about the market always seems to be strategic oriented rather

than accidental.

In this report, we scan the some cases of Apple’s partnership with mobile operators. And

you will get some clues about the reason why Apple acted like that.

Some assumptions used in this report are

that

- Apple usually chooses right

partners of iPhone by market.

- Apple asks the partners to give

enough subsidies to iPhone buyers

as to reach the Apple’s price

guideline. (ex. iPhone 3Gs

16GB/32GB, each price $199/$299)

- The partners payback the

subsidies with customers’ 2yrs

added package price.

- The partners should give an

amount of $800 to Apple as

supplying cost of one iPhone

device.

- ARPU is equal to profit. So we

don’t take into account about the

real cost mobile operators ought

to pay.

The above assumptions don’t include

other variables like other money passed

between Apple and partner.

Then now the partner should make the

2yrs added package price to recover the

iPhone subsidies transferred to Apple.



It is just not to have lower ARPU (Average

Revenue per User) for their mobile

subscribed customers.

The partner can even make down monthly

package price to the BEP (Break Even

Point). The BEP of monthly package price

can be calculated as iPhone subsidies

divided by 24 (months).

Two types of mobile operators

A) A leading mobile operator with large

market share more than 50% in specific

country

B) A lagging mobile operator with small

market share in specific country

About the iPhone, interest of A is keeping

its market share. Interest of B is take a

market share from A. Both A and B want

to increase their ARPU and overall profit.

Two types of iPhone effect on profit

a) One is that the mobile operator’s

Average Profit per User is not decreased.

So selling iPhones to the mobile operator’s

customers usually make no problem.

b) Another is that the mobile operator’s

Average Profit per User is decreased. So

selling iPhones to the mobile operator’s

customers make overall profits decrease.

In this case, the mobile operator should

mainly focus on selling iPhones to not-yet-

customers.

The most important thing that affects

above two situations is ARPU itself.

That’s because other parameters like

iPhone supplying cost and selling price are

mostly constant.

So the higher ARPU is, the more Average

Profit per User after introducing iPhone is.

Now we can design ‘Strategic Calculator’

that Apple might have.

Possible compositions of each type can be

presented as 4 cases (2 by 2).

Case-I) Both with high ARPU – AaBa

- Apple will tend to have partnership

with both A and B because the

market is so mature and they can

sell iPhones to their own

customers.

Case-II) Both with low ARPU – AbBb

- First, Apple will tend to have

partnership with B because A

might not have strong motive

about market share and profit with

iPhone.

- After B achieves some sorts of

market win, Apple will expand its

partnership to A.

Case-III) A, market leader with high

ARPU – AaBb


with A because A has superior

competitive advantage over B.

With more profitable structure A

can spend much more money on

marketing iPhone than B.

Case-IV) B, market follower with high

ARPU – AbBa


with B because B has strong

motive about market share and

profit with iPhone.

To sum up, it is always a good choice for

Apple to have a strong partnership with

mobile operator that has high ARPU to

recover the opportunity costs like iPhone

subsidies.



But when there are no mobile operator

with high ARPU, Apple will choose one

with small market share because it has

more motive about taking market share

from its competitors.

Lastly, you may have a question about the

exact number of high ARPU that can

recover iPhone subsidies.

We can reference ARPU growth rate of

mobile operators after iPhone introduction

in U.S and Japan.

Each number is about 61% (ARPU $95 for

iPhone user, $59 for non-iPhone user) and

26% (Overall Data ARPU 1,490 Yen before

iPhone, 1,880 Yen after iPhone).

The number of ARPU which is a splitting

point between high and low ARPU is

around $50. (60% ARPU growth rate, $30

recovered cost)

Now that I suggested a ‘Strategic

Calculator’ that Apple could use, it is up to

you to try and apply its model to your

country.

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The Economics of Apple iPhone Introduction (1)